Another ARK Rally, Another Bear Rally?

Sebastien Callebaut -

Tech Stocks At A Discount, Something Unseen In Years

Bargain hunting investors looking for steep discounts amid the stock market's turmoil are flocking back to Cathie Wood's ARK Innovation ETF, a long-time favorite. Since bottoming out on May 11, shares of the fund, which is mostly comprised of growth-oriented technology businesses, have risen 17%.

  • They've outperformed the S&P 500, which has gained 4.4% in the same time span
  • The fund, which trades under the ticker name ARKK, is still down 54% in 2022 and has been one of the most high-profile victims of the Federal Reserve's aggressive push to raise interest rates in order to cool rapidly rising inflation

Another Bear Rally?

Many analysts believe that conditions for stocks like those in the ARK portfolio will continue to be challenging. At their June and July policy meetings, central bank officials are expected to approve half-point interest rate increases, putting more pressure on the stock market.

“A bear market, that’s what makes it vicious: There’s extended periods where you can get significant rallies and it coaxes people back into the market thinking that the floor is in,” Dan Irvine, principal at 3Summit Investment Management

  • Back in 2020, investors poured into hazardous investments ranging from unsuccessful tech stocks to fresh cryptocurrencies, special-purpose acquisition firms and non-fungible tokens
  • Even after a severe drop, certain ARKK holdings still have sky-high prices. Tesla was trading at 56.2 times anticipated earnings late last week, down from 120 times at the end of previous year. Price-to-earnings ratios can't be tracked for other ARKK holdings that aren't yet profitable

According to FactSet, the S&P 500 was selling at 17.7 times earnings late last week, close to its 10-year average of 17.1. Last week, the technology sector of the S&P 500 traded at 21.5 times expected profits, down from 28.9 in September 2020.

BENCHMARK'S TAKE

  • The water will be choppy in the coming months as news of inflation and recessions will continue to cloud the skies
  • Chasing beaten down tech stocks may not work out well for cautious investors as many of these businesses face increased bankruptcy risks in a competitive business environment where funding has dried up

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Austin Distel on Unsplash.